jakiro
Author: Saurabh Deshpande, Crypto Researcher; Translation: Bitchain Vision xiaozou
Throughout history, currency has three key social functions.It is used as a means of storage, medium of exchange and unit of accounting for value (wealth).Although currency types have changed, their functions remain basically the same.In general, there have always been two schools of thought – one that supports credit currency or soft money, and the other that supports hard currency.Credit currency, like today’s fiat currency system, is someone’s debt.
The dollar or rupee you own is a government liability.If the government defaults, your money will not be able to purchase essential goods and services.
Hard currency, on the other hand, refers to non-government liabilities currency.For example, precious metals such as gold will not depreciate even if the government defaults.Instead, their value is enhanced by the stability they are considered.
Bitcoin is the first digital currency to successfully achieve non-sovereign hard currency.In 2009, Satoshi Nakamoto released Bitcoin, when the world had just experienced a global financial crisis because bad lending operations and unilateral interest rate decisions affected the money supply.The US dollar, which has been strong, has depreciated by more than 95%.In his article Paradigm Shifts, Ray Dalio, a loyal supporter of macroeconomics, describes how central banks respond to crises by lowering interest rates and the impact of crises on economies.
The figure above shows the decline in interest rates in developed countries since the 1980s.At the same time, the proportion of the monetary base to GDP is also growing.Therefore, the growth rate of total output cannot keep up with the growth rate of money supply.When the money supply grows rapidly, whether the household income growth rate is low or not, it can lead to higher inflation, higher cost of living, more debt burdens, and more severe income inequality.The high inflation environment we are currently in is the result of policies adopted by the central bank.
In this environment, precious metals (such as gold) stand out.The government’s intervention in the supply of gold is minimal.Due to the small government influence, the supply of gold is easier to predict than fiat currencies.This high degree of predictability has allowed gold to maintain its value for decades and become a means of storage for wealth.
Bitcoin was born as peer-to-peer electronic cash.Over the years, like many innovations, it deviated from (or at least expanded) the original goal of electronic cash and evolved into digital gold.
In 2018, I encountered the interesting metaphor of “blockchain city”.Blockchain is disconnected from the outside world and is more like closed islands.Each island has its own priorities and characteristics that reflect their respective technological and social structures.Bitcoin Island always prefers security and decentralized features compared to other aspects such as speed and programmability.
Decentralization is a generalized word that contains nuances.Balaji Srinivasan proposes a way to measure the degree of decentralization by subdividing the blockchain into different subsystems such as mining, clients, developers, exchanges, nodes and ownership.He proposed that overall decentralization can be achieved by measuring the Gini coefficient and mid-previous coefficient of the subsystem.
Many Bitcoin supporters such as Jonathan Bier believe that we can look at the degree of decentralization from the difficulty of users verifying transactions themselves.Verifying transactions is difficult because of the small bitcoin block (up to 4 MB).In order for blockchain to provide universal programmability (not just paper talk), developers have to do some planning.
First of all, the language or system they use should be Turing-complete.”Turing completeness” means that the system is able to perform any calculation that can be expressed by an algorithm given sufficient time and memory.
Secondly, gas measurement needs to be optimized.Gas metering refers to how a system is designed to measure resource costs (for example, the maximum gas consumption for each block and the gas consumption for different operations).Ethereum’s Solidity is a Turing-complete language, but it is often restricted by gas.Bitcoin’s scripting language is intentionally restricted to ensure higher security.Additionally, as Matt mentioned, it is a low-level stack language, full of unfixed bugs from the Satoshi era, and the lack of key operators to make it very useful.
Islands like Ethereum and Solana have evolved into interconnected islands, and vigorously developing interoperability benefits from it.However, while Bitcoin Island remains firmly committed to its security goals, it has not made any changes to its infrastructure that are more likely to be transferred to other islands.Bitcoin Island only allows residents of the island to hold, transfer or trade their BTC in exchange for inscriptions and runes of clumsy UX (user experience).
Due to the limited amount of things to do, BTC has been staying in the golden nest.At the same time, assets like ETH have a large number of opportunities to obtain income and passive income in the form of pledge, re-pled, borrowing, etc.Other islands have quickly modernized because of the development of new infrastructure, and Bitcoin remains a powerful old stubborn.
Don’t get me wrong, Bitcoin’s conservative approach does guarantee its security and decentralized nature.More features often bring complexity and make the attack more wide.
The concept of an independent island reminds me of my hometown of Mumbai.Once known as Bombay, it was originally composed of seven independent islands.The fusion between these islands began in the 1780s and lasted for centuries.Today, as I stroll through the bustling streets of Mumbai, I can hardly see traces of the previous separation.The unification of the city feels seamless, and the divisions of the past are almost completely forgotten.
This shift in Mumbai raises an interesting question: Will we see similar evolution in the Bitcoin space?Some teams are working in this direction.
This article will describe how some teams can build different ways of using BTC for Bitcoin users, not limited to holding.I will first explain why we need better infrastructure to lay the foundation and then dig deep into the various approaches adopted by teams aiming to scale BTC use cases.Finally, I will mention that the ultimate vision is about both social consensus and technical consensus.
Everything is going on, and the team is building different auxiliary islands for Bitcoin Island and finding solutions to modernize Bitcoin Island.Only when social revolutions broke out among the islanders and they were asked to agree to change the rules could Bitcoin Island be permanently reformed so that it could use the access to other islands as confidently as using the island’s internal infrastructure.bridge.
1. Why do you need better infrastructure?
Ethereum, Solana and other blockchains already have blockchains, and even the upcoming blockchains such as Monad, and their development and construction have taken developers into consideration.They are built as platforms for developers to build applications.These chains provide a comprehensive ecosystem with a variety of learning resources, tools, frameworks and features to support developers.Satoshi Nakamoto created Bitcoin casually, without a thoughtful API, nor a clear Bitcoin development learning document.
There are three main reasons for continuously improving network infrastructure – better user experience, greater financialization, and large-scale payment.
(1) Better user experience will drive activities and bring more benefits
The Ordinals protocol is a way to take advantage of Bitcoin UTXO, which looks at a single Satoshis (the smallest unit of BTC) in a different way, bringing innovations like Inscription (NFT on Bitcoin).Passion for ordinal numbers and inscriptions has given rise to the evolution of alternative standards such as BRC-20 and runes.Inscriptions and runes drive Bitcoin activity.With BTC transfer alone, the total daily transaction volume increased by 70%.
These new Bitcoin trading methods have helped increase transaction fees by about 40%.However, these new approaches often spark heated debate in the Bitcoin community.Yipai believes that Bitcoin should only focus on enhancing its core functions as a decentralized payment system.They believe that stepping outside this range may damage the security, simplicity and effectiveness of Bitcoin as a robust currency.
On the other hand, a faction that supports a more flexible approach advocates expanding the functionality of Bitcoin and including non-payment use cases.They believe that this evolution is necessary for Bitcoin to remain competitive and relevant in the rapidly growing blockchain ecosystem.
Is this enough?No.According to Token Terminal, Bitcoin miners have received about $109 million in fees in the past 30 days.During the same period, applications such as Uniswap and Lido Finance earned $90 million and $104 million respectively.The most recent halving was in April 2024, when miners received a 50% reduction in block subsidy.After the recent halving event, the block reward (subsidy) was halved from 6.5 BTC per block to 3.125 BTC.In this way, the total monthly subsidy cuts for miners reached 13,500 BTC (3.125*144*30).Based on 1 BTC of $66,000, it is a total of $891 million, so the monthly transaction fee only accounts for about 12% of the subsidy losses.
Recent developments (such as runes) are encouraging, but we need more.What other challenges?Bitcoin’s user experience is far less than Solana or Ethereum L2 like Arbitrum.For Solana, swap transactions only take a few seconds and cost less than a cent.However, if you want to trade runes on Bitcoin, you have to pay a few dollars and wait for the block to confirm your transaction.
In addition, when you buy runes, you must purchase the full listing quantity.Buyers cannot modify the quantity of runes purchased.Another disadvantage is that the runes cannot be redeemed, just like we can exchange USDC to MKR on Ethereum.Traders must sell one rune for BTC and then buy another rune they want.The additional steps in the middle will bring unnecessary friction to the user experience.
The user experience of Runes transactions is far from ideal.There is no way to use BTC as collateral or lend it out.Users must take BTC out of Bitcoin L1 and put it on other chains to use in financial applications.
(2) Increase the degree of financialization of BTC
First, Bitcoin’s market capitalization is close to $1.3 trillion (based on $66,000 at 1 BTC).Just like gold, Bitcoin is an external currency, which means the government cannot manipulate the supply of Bitcoin.Although the exact size of the gold loan market is not yet known, it has been reported to be $100 billion.Therefore, one of the most important reasons to build an application on Bitcoin is to borrow stablecoins using native BTC as collateral.A strong lending market will allow Bitcoin holders to earn profits from the BTC they hold.
Take pledge as an example.Other native assets, such as ETH and SOL, have inherent pledge purposes in ensuring network security; about 27% of circulating ETH pledges are in each pledge agreement, with an annual yield of about 4%.In addition, about 4% of ETH pledges are in the re-staking agreement, and 67% of circulating SOLs are pledged.In addition, ETH and SOL are both widely used in collateral assets in their respective DeFi ecosystems.
Packaged BTC (or WBTC) is the most widely used version of BTC in different DeFi ecosystems, with a market value of about US$10 billion, less than 1% of the total BTC in circulation.This shows the opportunity to exist in the financialization of BTC.
Assuming that Bitcoin at similar levels to Ethereum is used for staking or DeFi, at about 30%, the amount is $390 billion.As background introduction: The total locked value of all DeFi in all other chains is $101 billion.BTC is probably the most productive current asset.Now, this potential is bound by technical limitations intentionally imposed.
(3) Expand BTC payment
The design of the basic layer of Bitcoin does not take into account throughput.If Bitcoin must become the settlement layer of the Internet, we need faster transactions.As Mohamed Fauda said, the number of transactions that can be published in this way is limited.When the block size is up to 4MB, Bitcoin can support 6.66 kbps (4MB/10 minutes) of data.
The Bitcoin network is currently unable to handle high traffic.In expected events such as the casting and rune release of Quantum Cat, users face experience downgrades.The bad user experience is not limited to those who try to cast the inscription, but also those BTC senders and recipients.
Adoption of the leading Bitcoin expansion network Lightning Network (LN), is not optimistic.The network has a capacity or liquidity of about 5k BTC.This is the amount of BTC locked on the Lightning Channel.It affects the mobility of the network and the amount of BTC that can be transferred through the network.
Why is this important?Let’s give an example to understand.Joel is raising $1 million to pay wages to Indian coffee plantation workers, and he decided to use LN to receive donations.He can’t just open the LN wallet to receive donations.He needs $1 million inflows.Liquidity inflow refers to the amount of BTC locked in the channel by the counterparty.Sid is one of Joel’s counterparties, locking in $10,000.Joel needed more counterparties like Sid, who locked in a total of $1 million and accepted donations worth $1 million.This poses a major challenge to network capacity expansion, because inflow liquidity is always limited by capital opportunity cost.
2. Challenges facing Bitcoin development
Bitcoin is both a technological phenomenon and a cultural or social phenomenon.Social consensus is the last line of defense.For example, the hard cap of 21 million can be modified by forking code, increasing the distribution tail volume by 1%.But for this change to take effect, all miners must mine on this fork, which they are unlikely to do.This is because hard-coded ceilings have always been one of the main value drivers of BTC.If this upper limit is broken, a loss of value may occur.Miners are unlikely to mine on forks that may lose value.
The technical efforts required to change the code base will become useless due to a lack of social consensus.The last time Bitcoin had a controversial fork was during the block war in 2017.The network is split into two, and Bitcoin implements SegWit and Bitcoin Cash, which increases the block size.At that time, most miners chose the BTC camp.
What is considered a means of money or store of value must be infrequently changed.The main reason fiat currencies lose purchasing power over time is that central banks often use their power to increase supply.The unpredictability of the central bank’s unilateral actions has made some currencies weaker forever.Bitcoin culture resists change.Even something uncontroversial like Taproot took years to come.
Realizing the above changes not only involves changes in Bitcoin.The basic layer of Bitcoin also needs to be as simple as possible.Simplicity is crucial to reduce attack vectors and improve stability.The main goal is to perform complex operations such as lending and using BTC to mint stablecoins as collateral outside the base layer (such as Ethereum L2).
3. Bitcoin L2?
What is L2?it should:
· Provide sufficient data for L1 to verify and resolve disputes (if there is any dispute).
· There are no security assumptions outside the base layer.
· Allow users to unilaterally withdraw assets to the base layer or L1.
These conditions cannot be met because the current Bitcoin opcodes limit it to verify any proof.Therefore, all chains claiming to be Bitcoin L2 cannot be called L2.
Another aspect that constitutes L2 is to examine the security assumptions of that layer with reference to Bitcoin’s security assumptions.Every blockchain has security assumptions, such as:
· Most mining nodes are honest.
· The node can independently verify the block and reject invalid blocks.
· The fork is resolved to be the longest branch of the support chain, and so on.
Layer 2 (L2) should not extend the set of security assumptions for the underlying layer on which it is based.For example, if the second layer has a centralized sorter that monopolizes block production, the user needs to be able to compete for block production at a slight cost.L1 should be able to command L2, and can be released as long as the user’s funds are not spent.For this stage, there are no such mechanisms even in Ethereum L2.
If we strictly follow the L2 features mentioned above, even consensus Ethereum L2 like Arbitrum is not really L2.Since the current set of Bitcoin opcodes prevents it from verifying any proof, a chain that claims to be Bitcoin L2 cannot be called L2.Lightning Network is probably the only solution that meets the L2 definition.This article uniformly calls these solutions the Bitcoin expansion layer.
4. The pros and cons of Bitcoin expansion layer
Broadly speaking, there are two components to using BTC: 1) use bridging, because there is not much available on Bitcoin; 2) create an environment or a chain so that investors can run applications using BTC on it.
To facilitate more use cases and larger scale, new layers may make security assumptions on top of Bitcoin.Users who want to use their own BTC will want to make the lowest possible trade-offs on the pros and cons in terms of security.Ethereum’s expansion roadmap is a good reference, from which we can understand how Ethereum’s expansion design space evolved.
A few years later, Ethereum realized rollup would be its expansion option.At this stage, we still don’t know which method is the best way to scale and make BTC more programmable.
Whether storing data or choosing a bridge design, projects have to make a trade-off between decentralization, security, speed and user experience.The answers to the following questions form the design space for a project or company that builds the Bitcoin expansion layer:
·How do they achieve the bridge from Bitcoin to new chains?
· How do they store data (data availability)?
·How do they use Bitcoin L1 for settlement?
·Do they expect to change the base layer of Bitcoin to achieve their complete vision?
·What kind of execution environment do they choose?
·Did the Bitcoin expansion layer promote the use of BTC in gas and staking?
Different teams are making different tradeoffs to provide BTC holders with better functionality and scale.
5. Bridge
BTC on Bitcoin cannot be transferred to other chains.Some infrastructure is needed to bring BTC to other chains.A typical bridging mechanism locks the user’s BTC on Bitcoin and mints an equal amount of synthetic tokens representing BTC on the target chain.
What is the typical locking mechanism?This means that users who want to transfer BTC from Bitcoin to any other chain will send it to a specific address on Bitcoin.The bridge operator controls this address.When the bridge operator detects an incoming BTC, they mint the equivalent synthetic token representing that BTC and send it to the address specified by the user on the target chain.
The risk here is that if the bridge operator loses BTC on Bitcoin, the tokens minted on the target chain will become worthless.We saw this risk firsthand after the FTX crash.SolBTC is a BTC packaging version operated by FTX/Alameda.It became worthless because FTX failed to deliver on its redemption promise after filing for bankruptcy.
Therefore, everything users do on the target chain depends entirely on the security practices of controlling users’ BTC on Bitcoin.How to control the user’s BTC determines different types of bridging methods.There are currently three design types that are put into production.
(1) No trust-free bridge
These bridgings are only possible to succeed if L1 can verify the proof of L2 submitted.As far as Bitcoin is concerned, this is impossible because it cannot understand anything that is happening outside.
(2) Trust minimization bridge depends on economic security
The next best option for BTC bridging is to have multiple public parties deal with peg-in and peg-out.These parties protect users’ BTC security on Bitcoin and mint/burn synthetic BTC tokens on other chains.One of the implementations is Threshold Network’s tBTC, which works for “the honest majority”.
This means that before the operator performs any operation on the user’s BTC, it is necessary to reach a consensus among most operators running the Threshold Network node.tBTC does not have a centralized intermediary, but instead randomly selects a group of operators running nodes on the Threshold Network to protect the security of the user’s deposited BTC.
Who can become a node operator for Threshold Network?The network has a governance token T. Although T is used for governance, it requires at least 40,000 T to become a node operator.As of June 25, 2024, the number of active nodes on the network was 139.
The tBTC Beta Staker Program aims to gradually decentralize the node network.Beta stakers can entrust their stakes among five professional node operators—Boar, DELIGHT, InfStones, P2P and Staked.It is expected that Beta stakers will actively participate in node operations for at least 12 months.For example, they need to be highly responsive to network upgrades, preferably within 24 hours of notification.
Whenever a user requests to mint tBTC, a new Bitcoin deposit address is generated.This address is dedicated to this user and is controlled by a node on the Threshold Network.Users can request to cast tBTC on networks such as Ethereum, Arbitrum, Optimism, Mezo and Solana.
They need to provide two addresses – one is the recovery address of Bitcoin (this is the address that their Bitcoin will be returned if there is a problem during the mining process), and the other is the target link address they want to receive tBTC.Once a request is made, the user must deposit the BTC to the generated address and wait for guardian to confirm their deposit.Once confirmed, the miner will send tBTC to the user’s address on the target chain.
The network has about 3,500 bitcoins, or more than $200 million in locked value.
Given the functionality of Bitcoin opcodes, trust minimization bridge can be said to be the best bridge implementation method at present.The implementation of trust minimization bridging depends on how multi-signature is designed.Threshold Network’s tBTC, Stack’s upcoming sBTC deployment, and Botanix’s spiderchain are examples of trust minimization bridging.
(3) Hosted bridge
In this design pattern, a centralized provider locks users’ BTC on Bitcoin to a Bitcoin address maintained by the custodian.BitGo’s WBTC is the most widely used BTC to bridge other chains.BTC bridged with WBTC exceeds 150k.The current distribution of WBTC is shown below.
(4) BitVM
Although these three types of bridging are already online, Robin Linus released the BitVM white paper at the end of 2023.BitVM proposes a new way to express Turing-complete smart contracts on Bitcoin.If a machine or system can perform any calculations within enough time, we say it is Turing-complete.As mentioned earlier, Bitcoin is not Turing complete from a design perspective, and BitVM proposes a way to solve this without changing the existing opcode.It also proposes a bridging mechanism that is allegedly trustless.
The core philosophy of BitVM is to optimistically verify the ZK (zero knowledge) proof on Bitcoin.As long as there is no objection to the execution of the transaction, it is assumed to be correct.The operation of the system usually assumes at least one honest verifier.That is, if the execution is incorrect, at least one honest validator should challenge it.
So, as long as ZK proves that it is not questioned, everything is fine.If there is objection, challenger and prover enter the challenge-response game on the chain, with the consequence being an increase in the on-chain transaction load.
Liquidity management is another major drawback in the early versions of BitVM.When the user withdraws money from the bridge, the system completes part of the withdrawal and the bridge operator must face liquidity.The operator will receive compensation from the bridge later.As the amount of funds locked in the bridge increases, the operator must maintain more liquidity to cash out the withdrawal.This puts pressure on the operator and makes the design extremely inefficient.
Assuming, on average, the operator needs to keep 10% of the bridge TVL as liquidity at all times.If the bridge’s TVL is $10 billion, the operator needs to always maintain $1 billion in liquidity.As the bridge attracts more liquidity, operators need to have more BTC stocks on hand.
6. Execution layer
The next problem that makes BTC useful is the design of the chain to promote the use of BTC with the best user experience possible.Developers need to consider multiple factors when designing chains.
· Execution Environment – Should it be a chain compatible with Ethereum Virtual Machine (EVM)?
EVM compatibility has its advantages, for example, tools that can be used by developers for several years, such as bridging of wallets and other EVM chains; in addition, UX that users are familiar with.
Ethereum’s L2 has benefited from EVM compatibility.EVM-compatible L2 like Arbitrum and Optimism can quickly gather users and applications already on Ethereum.In contrast, L2, which is incompatible with EVM, is difficult to adopt, like Starknet.
However, EVM also has its drawbacks.Because EVM executes transactions in serial mode, parallel processing is not possible.However, newer execution environments, such as Solana Virtual Machine (SVM) and the upcoming Monad, support parallel processing.
·Data Availability—Similar to Ethereum, rollup solutions have also emerged in the Bitcoin field.Rollup comes in various forms depending on the way and location of the data being stored.Some store state differences on L1 (the difference between the two states of the chain after a batch of transactions is executed) and validity proof, some store compressed transaction data on L1, and some store only validity proof in L1.On the other layers, transaction data is stored.
Chains like Stacks use Bitcoin as a checkpointing mechanism.Block time on Stacks is much shorter than Bitcoin.Stacks publishes the block data between two Bitcoin blocks to each Bitcoin block.
The execution layer can publish transaction data in the form of inscriptions on Bitcoin.Recall the era of 6.66 kbps bandwidth in the Bitcoin network.If a compressed file has a size of 10 bytes, a Bitcoin block can theoretically contain up to about 600 compressed transactions.However, this maximum is nearly impossible, as 4MB blocks are a rare phenomenon, and even more rare, the entire 4MB space can be used for inscriptions.
Block size depends on the combination of SegWit and non-SegWit transactions.SegWit is the abbreviation of Segregated Witness, which separates or isolates transaction data from witness data.The idea is that not everything stored in a block has the same value.Instead of limiting the block size to the traditional 1 MB, SegWit proposed a new limit of 4 million units of weight.Therefore, if a block contains all non-SegWit transactions, the limit will be 1MB.But if it contains all SegWit transactions, it could be a 4MB block.
Some teams are building a Bitcoin layer to take advantage of the huge liquidity of BTC.In this article, we looked at six teams, who all had different tradeoffs and were all very interesting in design.We will briefly describe how they work, their development stages, and their traction conditions to date.
(1) Babylon
Babylon focuses on expanding the use of BTC into a pledged asset.It brings a different approach from other Bitcoin layers (so-called L2) in the form of remote staking BTC.This means that instead of locking BTC on Bitcoin in order to mint synthetic versions on different layers, Babylon introduces the following mechanism:
Users lock their BTC in a self-hosted vault by creating a UTXO that can only be used once. This UTXO can be used at a pre-specified time (staking period) or through a special EOTS (Extractable one-time signatures) burn their pledge when using UTXO.
· After confirming the pledge transaction, users can use their EOTS to verify the blocks on the PoS chain in the Cosmos ecosystem to earn income.
· If users are honest, they can unlock their BTC at the end of the staking period, or submit an unbinding transaction to Bitcoin.
· If dishonest behavior is found, the user’s EOTS will be disclosed to the public.How to detect this?Babylon’s vigilantes ensures at least one honest operator.It is a program suite that acts as a data relayer (repeater) between Bitcoin and Babylon.The submission program uses OP_RETURN to submit a Babylon checkpoint to Bitcoin.The Reporter program scans the Babylon checkpoint and reports it to Babylon.If an exception is detected, anyone (slasher) can submit a Bitcoin transaction using a public EOTS key to claim the stake of a malicious user.
An obvious question is, why can’t users get back the pledge using their own key?The answer may be that when the miner sees the transaction, if someone else initiates the same transaction, the miner will choose a higher-cost transaction.For example, if the stake is suspected to be 5 BTC, then slasher can even make a profit if it shares 4.99 BTC with miners.In this case, most of the profits flow into the miner’s pocket, not the slasher.However, the malicious user lost most of their stake and was either taken away by slasher or by miners.
Although Babylon provides an interesting way to extend the use of BTC, its mechanism is rather complex.For example, slasher has not been successfully deployed on many PoS chains, although some have been around for many years.Additionally, while Babylon can leverage remote staking so that BTC can be used to secure other PoS chains, it requires bridging to support other BTC use cases, such as loans.
(2) Build on Bitcoin (BOB)
Ironically, Build on Bitcoin (BOB) is an Optimism-based rollup that is still settled on Ethereum as of June 2024.It claims to be an Ethereum L2 aligned with Bitcoin.BOB will be launched in four stages:
·Stage 1——OP stack rollup.At this stage, it is purely an Ethereum rollup.The fraud certificate has not been launched on the main website yet.Fraud proof is a mechanism that allows anyone to question the validity of transactions contained in a rollup transaction package.
·Stage 2 – Ethereum rollup with Bitcoin security.At this stage, BOB will use Bitcoin’s merger mining.Merger mining allows miners to work with the Bitcoin network to protect multi-chain security or mining.
·Stage 3—Optimistic Bitcoin rollup implemented through BitVM.BitVM is not available yet.After improving the current version, BOB will start to settle on Bitcoin using BitVM.
·Stage 4—ZK rollup on Bitcoin.After Bitcoin accepts opcodes that allow it to verify the ZK proof, BOB will use the ZK proof to settle on Bitcoin.
As of June 17, 2024, BOB has had about $60 million in TVL, of which Sovryn DEX contributed about $20 million.
(3) Botanix
The Botanix team brought a major innovation: Spiderchain.What is Spiderchain?It is a scroll multi-select for the co-ordinate point on Botanix.Let’s analyze it in detail.As we mentioned earlier, L2 requires a bridge and a chain that executes transactions.The co-ordination point safely saves the user’s funds on Bitcoin and mints and burns the user into BTC (on the EVM layer).Orchestrators (Coordinators) run bitcoin and Spiderchain EVM (Botanix) nodes.
Suppose there are N co-regulation points on the network.Randomly select M for each bitcoin block (
Botanix’s chain is EVM-compatible and is protected by the PoS consensus mechanism.In addition to protecting BTC security on Bitcoin by participating in the rolling multi-signature network and facilitating the minting and redemption of synthetic BTC, the coordinator also participated in the block construction of the EVM chain.They release the root hash (a compressed version of Botanix EVM transaction) as an inscription for Bitcoin.
Readers must note that simply publishing Bitcoin data does not mean settlement.The difference is that external chains like Botanix are stored in the form of inscriptions in a place that has not been verified by the Bitcoin node (miner).The Bitcoin protocol has no idea of the existence of this data.Therefore, it is impossible to determine whether the transaction data published in the inscription is correct.
As of June 2024, Botanix EVM and Spiderchain are in the testnet phase.
(4) Citrea
Citrea is developing a ZK rollup on Bitcoin.What does “on Bitcoin” mean?It means it intends to use Bitcoin as the data availability layer.The company said the safest and consistent way to scale Bitcoin blocks is to shard execution with on-chain verifiability and data.Shard execution means breaking the execution into smaller parts.
Citrea then aggregates shards or transaction packets and publishes the difference in state between the two transaction packets on Bitcoin, as well as a proof called proof of validity.But the problem is that Bitcoin has no ability to verify any proof yet.The final form of Citrea will have to wait until Bitcoin has an opcode that allows it to verify the ZK proof.
Meanwhile, it will use BitVM implementation as a proof temporary solution and bridge BTC into and out rollup.Of course, Citrea inherits the shortcomings mentioned by BitVM in the previous content.In the future, with BitVM improvements, Citrea will improve its bridging capabilities.
As of June 2024, Citrea is still in the testnet stage.
(5) Mezo
Mezo labels itself as the economic layer of Bitcoin and does not call itself Bitcoin L2.It uses Threshold Network’s tBTC bridge to bring BTC into and out of the EVM chain – Mezo.
Mezo’s development team has developed products such as tBTC, Fold, Keep and Taho.The team has been developing applications around Bitcoin for years.Mezo’s goal is simple: extend the use cases of BTC.It adopts the following three mechanisms:
·Let Mezo users earn profits by pledging BTC to protect network security.
· Let users pay gas fees using BTC and allocate them to veBTC and veMEZO stakers.
·Build an end-to-end BitcoinFi experience.
What exactly does BitcoinFi and the economic tier mean?Most new chains, including EVM chains, rely on existing user experiences—the same wallets, bridging schemes, and so on.Updated user experience is almost never a priority.Mezo curates the entire user experience from scratch, which I rarely see.It includes:
·Native stablecoin (mUSD) supported by BTC, so users do not have to bridge BTC from other chains.
· A long-tail lending agreement secured by BTC.
· A fully integrated deposit and exit channel (compatible with Fold).
·Integrated wallet experience (Taho compatible).
Combining all of these applications create a unique end-to-end BitcoinFi experience:
Mezo is based on the Cosmos SDK and uses Comet BFT to reach a consensus.
CometBFT is software for safe and consistent replication of applications on multiple machines.Speaking of “safety”, we mean that CometBFT can still work without more than 1/3 of the machine failing in any way.Speaking of “consistent”, we mean that every failure-free machine can see the same transaction log and calculate the same state.Secure and consistent replication is a fundamental problem in distributed systems; it plays a key role in fault tolerance in a wide range of applications, from currency to elections to infrastructure orchestration.——Source: CometBTF Document
It consists of two components—a consensus engine and a common application program interface.Based on the Tendermint core, the consensus engine is responsible for block generation, verification and final certainty.Tendermint is one of the earliest proof-of-stake consensus designs.It provides Byzantine Fault Tolerance (BFT) consensus that can accommodate up to one-third of malicious nodes.
Application Program Interface – Application Block Link Port (ABCI) – separates the consensus engine from the application.A major advantage of ABCI is that since consensus and application are separated, developers do not need to build applications using the same language that builds consensus engines.
The interface acts as a medium for passing transactions to the application for execution.This feature makes the system more modular and helps focus more application developers.Initially, Mezo will be compatible only with the EVM runtime.
Mezo’s economic design is like this: As it grows increasingly prominently, Bitcoin holders may benefit directly or indirectly.They can hold BTC on Mezo and get pledge proceeds, or, if they choose to continue holding BTC, they will get some benefits by exiting BTC out of circulation (using to pay for Mezo’s fees).
Mezo has a double staking model as shown in the figure below.Verifiers on the network can pledge BTC and MEZO (native tokens of the MEZO network).By pledging BTC and MEZO, the verifier obtains veBTC and veMezo respectively.”ve” stands for validator escrowed, which are usually locked in smart contracts.Token holders hosted by validators have governance rights, and network rewards and fee income are shared with them.
The longer the asset is locked, the more ve tokens will be issued.The veBTC staker receives BTC, and the veMEZO staker receives MEZO reward.Burn part of MEZO rewards to increase BTC funding.
Yield is one of Mezo’s core products because the fees paid by users are paid to verifiers who pledge BTC.Mezo will further expand the scope of BTC staking by providing liquid staking with Mezo’s sister project Acre.When users deposit BTC into Acre, they get a liquid pledged token stBTC in return.BTC storage can be applied across chains and is used in various DeFi applications.The benefits generated through these activities are accumulated in the form of stBTC and exchanged with BTC in a 1:1 ratio.
BTC, with a market value of over one trillion US dollars, has not even reached the surface of the lending market.The WBTC distribution in the lending market is shown in the figure below.It shows that the number of WBTC used in the top three lending applications dropped from about 50k to about 23k between July 2023 and June 2024.The decline in total WBTC in lending applications can be attributed to a 48% decline in WBTC supply, from 285,000 WBTC in May 2022 to only over 150,000 WBTC today.This decline is mainly due to the market’s awareness of the risks posed by the parties centralized after Luna, 3AC and Alameda.
During the first phase of its launch, Mezo has begun accepting three lock-in BTC deposits, namely: two months, six months and nine months.Deposits accumulate points with HODL scores.A BTC generates 1000 points per day, and the multiplier is related to the lock-up period.The longer the lock-up period, the higher the multiplier.Users can also deposit other assets such as USDe, USDC and USDT to improve their BTC deposits.As of July 2024, Mezo’s TVL was $135 million.
In addition to rewarding holders, Mezo will also share some of the fees with the Bitcoin Core Agreement.
(6) Stacks
Stacks (formerly known as Blockstack) recently launched the long-awaited Satoshi Nakamoto upgrade, aiming to solve problems such as constant forking and slow transactions before the upgrade.Stacks works based on transfer proof (PoX) consensus.
Therefore, Bitcoin miners interested in producing blocks on Stacks need to send some BTC.A miner, such as Alice, is randomly selected to produce blocks on Stacks.BTC from this miner is given to those users who lock/hold STX, the native token of the Stacks chain.This is interesting because although the returns are small, it is BTC.On most chains, the earnings are provided only using the chain’s native tokens.
Once selected, Alice can generate Stacks blocks until Tenre (the next Bitcoin block) ends.The miner generates Stacks blocks to share with the signers for verification.Once more than 70% of signers receive the Stacks block, it will be accepted by the Stacks network.Let’s assume that Alice generates 10 Stacks blocks before the next Bitcoin block is mined, and Bob wins the term of subsequent production of Stacks blocks.
Bob gets the hash value of the first Stacks block generated by Alice on Stacks and adds it to his block submission transaction for inclusion in the Bitcoin chain.Stackers detects this transaction.They contain a term change transaction on Stacks that contains the hash of the last block generated by Alice on Stacks, in this case the 10th block.In this way, Bob understands that he must create on blocks before Alice (#10).
Although the development of the Bitcoin layer is still in its early stages, the above chains are still compared here, considering the guarantee of chain design, bridging design and US dollar value.
What we must mention is that in addition to the teams mentioned above, there are many other teams (such as Alpen, Bison, BitLayer, Rootstock, SatoshiVM and Soveryn) that are building the expansion layer of Bitcoin.
7. The relationship between L2 and L1
L2 favors L1 in two ways: scale and cost.They provide users with a cheaper way to trade without sacrificing too much security (or any security in the case of unmanaged, trustless bridging and no additional security assumptions).
Take Ethereum L2 as an example.According to Token Terminal, Ethereum supported 7.1 million transactions and revenue was $10.6 million in the second week of June 2024.The user’s cost per transaction is about $1.50.Meanwhile, the five L2 platforms, Arbitrum, Base, Blast, Optimism and Polygon, support over 70 million transactions with a fee of $2.75 million.Each transaction fee is $0.03.
We can argue about the quality of the transaction (including whether it is a robot transaction) or the value of the transaction, etc.However, the truth is that Ethereum cannot support so many transactions.
But one drawback is that L1 is no longer directly connected to their customers or users.In the traditional world, most of the value is usually taken by businesses that are closer to the end user.Amazon is a good example.Its massive distribution network gives it the upper hand in competition with suppliers and manufacturers.
Dollar Shave Club broke the traditional retail channel and sold directly to consumers through the subscription model, disrupting the razor industry.This allows them to implement lower product pricing while retaining most of the value rather than sharing value with the entire supply chain.
Adding another layer between you and your clients is usually not a good idea.Why does L1 take this path?Let L2 join in, L1 will not lose customers.They are introducing B2B into the once harsh B2C business model.But there may still be a question – can L2 get most of its value?Have they passed L1 enough fees?
Fortunately, Ethereum has been going this way for the past three years, and we can observe the impact of L2 on Ethereum’s value acquisition.There are two ways to understand whether L2 is a predator of the Ethereum ecosystem.
·The first way is to see whether Ethereum will lose revenue due to L2.We can test this by studying the changes in Ethereum’s revenue share in Ethereum ecosystem revenue.The following figure is about Ethereum and the five leading L2 revenues.Ethereum has always accounted for more than 90% of the revenue stream.
· Another way is to look at market value or price.Since value capture is almost always reflected in price, ETH accounts for more than 95% of the total Ethereum ecosystem’s market value compared to L2, which ranks in market value.
Ethereum cannot support so many transactions, but it still accounts for more than 90% of the ecological value, which shows that L2 is the right measure to expand Ethereum.As long as L2 is based on L1, the healthy competition for the L1 block space between L2 will herald the healthy development of the basic layer.
8. What will happen next?
Think about the metaphor of the island again.When it comes to real L2, the two islands must work together to build a bridge.But this is impossible without the internal consensus of Bitcoin Islanders.The situation is now that those who want to be the L2 island of Bitcoin Island are trying to ensure that infrastructure is a stopgap solution.
So once Bitcoin Islanders agree that they need to connect with other islands to achieve growth, the L2 island is there.Until then, it is important not to try to find more complex ways to bridge or create L2, but to focus on using methods that have worked and using combat-tested infrastructure.
Everyone knows how Bitcoin Islanders are self-confidence and how they attach great importance to security.Any changes made to the island have been discussed thoroughly and thoroughly.Anyone who wants to make a suggestion for Bitcoin can draft a Bitcoin Improvement Proposal (BIP).After informal discussions on various forums, the author absorbed feedback and modified the BIP.The Islanders Council then provides the BIP with a date, which is when it was officially confirmed.
Some islanders know that they need to be careful and modernized.Teams such as Botanix, Taproot Wizards and Thesis are laying the foundation for adding opcodes to expand Bitcoin’s programmability.BIP-420 (also known as OP_CAT) proposed by Ethan Heilman and Armin Sabouri will bring a lot of exciting possibilities to Bitcoin.CAT is an opcode that is part of the original Bitcoin opcode, but was modified by Satoshi Nakamoto due to security issues, and these problems have now been alleviated with the development of the Bitcoin execution environment over the years.
The opcode allows two segments of data to be connected together.It unlocks many possibilities from custom transaction types (such as dynamic custody systems, smart contracts such as atomic transactions), various DeFi applications, and greater interoperability with external chains.
Teams like Starkware have pointed out that OP_CAT can bring STARK verification to Bitcoin.This means that Bitcoin can verify ZK proofs, thus supporting rollup.This design paradigm not only allows for universal design on Bitcoin, but also improves the scalability that Bitcoin desperately needs.
Other designs by the Taproot Wizards team, such as CATVM, have been put into development.This design will use OP_CAT to create a trustless bridge.Unlike the current BitVM design, CATVM has no liquidity requirements.CATVM will implement decentralized transactions of ordinal numbers and runes, and its user experience is as good as other chains.
Segwit paves the way for Taproot, which is crucial to ordinal numbers.Ordinal numbers and inscriptions make BRC-20 and runes possible.The enthusiasm of Bitcoin developers recently shows that more and more people support social consensus on BIP-420.It will also be backward compatible, so the network does not need a hard fork to activate it.We are glad it will be available online, allowing us to witness a new era of true Bitcoin native programmability.
After a long time, developers’ interest in Bitcoin has surged.All independent projects developed and built around Bitcoin are like modern islands surrounding the powerful Bitcoin island.With BIP-420, we will likely have a way to merge these islands together to form a prosperous modern island.
With the many changes that happen to Bitcoin, I hope that in the future we will be able to use BTC in different financial applications, and we know very little about its underlying layer.The convergence of the Bitcoin layer is as natural as we feel when we are traveling through Mumbai today, and we are completely unaware that this bustling metropolis once was the seven independent islands of Bombay.
